Retail alternatives to triple to nearly USD1trn by 2017, says Citi Prime Finance survey |
Date: Friday, May 17, 2013
Author: Emily Perryman, HedgeWeek
The
growth forecast comes amid new flexibility for mutual fund and
exchange-traded fund (ETF) providers, unprecedented levels of transparency
among hedge funds, and new demands from wealth managers and broker-dealers
who want to add alternatives to more mainstream portfolios.
The outlook and analysis is contained in the fourth edition of Citi Prime
Finance’s annual survey of hedge fund industry trends, this year titled The
Rise of Liquid Alternatives & the Changing Dynamics of Alternative Product
Manufacturing & Distribution. The survey is based on 82 in-depth interviews
conducted in the US, Europe and Asia with hedge fund managers, asset
managers, private equity companies, consultants, funds of hedge funds,
pension funds, sovereign wealth funds, endowments and foundations, and
intermediaries representing USD336bn in hedge fund assets and USD5.6trn in
overall assets.
According to the survey, in the US alone, where retail participation in
alternative investment focused mutual funds and ETFs currently stands at
USD259bn, new demand will push assets in these vehicles to USD770bn by 2017.
Add to that expected new demand for liquid UCITS-structured products in
Europe and elsewhere and the total forecasted growth in retail assets moving
into hedge funds and other private funds jumps to USD939bn globally. In
addition, demand from smaller institutional investors for lower-fee,
publicly offered products will push overall global demand for these
so-called liquid alternatives to USD1.3trn, a level equal to the total
assets invested in all hedge funds in 2008.
“The bridge has been crossed,” says Sandy Kaul, US head of business advisory
services at Citi Prime Finance. “The convergence trend that has been
blurring the lines between traditional asset managers, hedge funds and
private equity firms is complete. Investors can now source an entire range
of products from each type of investment firm and for the more liquid of
these strategies they can also source the management of the funds in a
publicly or privately offered fund structure.”
Survey respondents pointed to three major trends powering the shift to more
liquid hedge fund vehicles:
• Regulations enacted under the 1940 Investment Companies Act
are making mutual fund and ETF structures more attractive for alternative
strategies.
• Dodd-Frank regulations of private funds are forcing
unprecedented levels of transparency on hedge funds and requiring
participants to create compliance and reporting procedures that more closely
mirror the demands placed on publicly offered funds.
• Shifting dynamics in the wealth advisory market are creating a
growing need for alternative strategies. First, more wealth advisors in the
US are getting paid a combination of fees and commissions, so ensuring the
stability of their asset base is critical. Second, more assets are flowing
to independent Registered Investment Advisers (RIAs), who often have an
“open architecture” approach to investment vehicles and are active in
supporting new fund launches. RIAs also have more discretion over client
portfolios and can purchase alternative retail products on their behalf.
“Liquid alternatives are reshaping the hedge fund and the overall investment
landscapes,” says Alan Pace, global head of sales and client experience for
Citi Prime Finance. “While the emergence of publicly available liquid
alternatives has already had an impact on the hedge fund industry, we are
only in the early stages of growth.”
Alternative assets include investments beyond stocks and bonds which tend to
be less liquid or tradable. Three of the most recognisable strategies within
the publicly offered liquid alternative sector are long/short equity, market
neutral and bear market funds. Others are non-traditional bond funds,
managed futures and currency funds, according to the survey. The survey
found these new products being managed in parallel with privately offered
funds, allowing the same manager to isolate a subset of their more liquid
trading ideas and package them in a publicly offered fund wrapper.